Administration November 12, 2002

CalPERS Calls on Congress To Close Offshore Loopholes

December 11, 2002 (PLANSPONSOR.com) - The California Public Employees' Retirement System (CalPERS) is drafting a letter urging Congress to remove incentives for companies to move offshore for tax purposes, according to a Dow Jones report.
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The report was based on a letter drafted by CalPERS Chief Investment Officer Mark Anson, that calls on Congress to close federal tax loopholes that provide an opportunity for US corporations to reincorporate in offshore tax havens.

“As part of this effort to halt further expatriation, we urge Congress to take immediate action to eliminate the tax incentives that entice companies to relocate to tax haven foreign nations,” Anson said in the letter.

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Those tax incentives allow companies to reincorporate in an offshore address in a “corporate inversion.”   Companies can then cut their tax burden by avoiding US taxes on overseas income; even though in most cases, the companies only set up a shell account, keeping their main operations in the US.

Anson adds in the letter than these tax benefits are obstructing shareholder ability ” to pursue their rightful legal remedies in the event of mismanagement or illegal actions.”

This is the latest in recent steps taken by CalPERS to halt corporate inversions.   In  November , CalPERS asked the boards of Tyco International, Ingersoll-Rand and McDermont International to allow shareholders to vote next spring on whether the firms should repatriate to the US.

Last summer California Treasurer Phil Angelides, who sits on the boards of CalPERS and the California State Teachers Retirement Systems (CalSTRS) – two of the largest pension funds in the nation, has previously proposed a blacklist of 23 companies that have undertaken such moves to avoid taxes – a list that could add up to $752 million of holdings for the California funds (see  Cal. Treasurer Targets Firms Heading Offshore ).

Investing November 11, 2002

Hedge Fund Numbers On The Decline

November 11, 2002 (PLANSPONSOR.com) - As many 500 to 750 hedge funds may be forced to close by the end of 2003, according a Wall Street Journal Report.
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The steady growth of hedge funds every year since 1988 may be coming to a halt, says George Van chairman of Van Hedge Fund Advisors International, Inc., a Nashville-based hedge fund advisory firm.  Van projects between 500 and 750 hedge funds to no exist by the end of 2003.

The Hennessee Group concurs and expects between 300 to 500 funds closing by the middle of 2003.

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Even as hedge funds have outperformed mutual funds over the previous year – the average hedge fund has declined 3.6% while the average mutual fund has decreased 28.2% – hedge funds may be in for a decline in numbers.

The fact that hedge funds have lost money at all cuts into the amount of money raised from fees collected.   Unlike mutual funds, a down year for a hedge fund can often lead to that fund closing its doors.   “The majority of hedge fund compensation is directly related to performance. When a hedge fund is unprofitable for a year, it typically loses most of its fee income. So, in the current market, with about one-half of hedge funds being unprofitable this year, most will not receive the fees on which they depend to pay their expenses”, went on to say Van.

In addition to poor market performance, hedge funds are also hampered by the inability to raise funds and the current climate of consolidation. Smaller funds – those with assets between $10 million and $50 million – are most at risk here.  

These smaller funds depend more than their larger counterparts on high net worth individuals to provide financing and therefore the ability to maintain operating expenses. When the funds get low, smaller funds either close their doors, or are bought up by traditional financial institutions eager to get into the hedge fund market, such as FleetBoston or Wells Fargo.

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